Mexico’s Congress approved a bill to end a 75-year state oil monopoly and generate as much as $20 billion in additional foreign investment a year.
The nation’s most significant economic reform since the North American Free Trade Agreement secured the required two-thirds majority in a 353-134 lower-house vote yesterday. The proposal must be ratified by state assemblies, the majority of which are controlled by the alliance backing the reform.
The bill will change Mexico’s charter to allow companies such as Exxon Mobil Corp. (XOM:US) and Chevron Corp. (CVX:US) to develop the largest unexplored crude area after the Arctic Circle. Supporters say the overhaul could propel Mexico into the top five crude exporting countries while opponents say it will funnel resource wealth to foreign investors. The peso gained.
“The reform will energize Mexico’s economy,” Carlos Capistran, chief Mexico economist at Bank of America Corp., said in a telephone interview yesterday. “Congress was able to pass a better-than-expected constitutional reform.”
Mexico Oil Proposal Hits a Nerve
Producers will be offered production-sharing contracts or licenses where they get to own the pumped oil and will be allowed to log crude reserves for accounting purposes.
The reform could boost foreign investment by as much as $15 billion annually and potential economic growth by half a percentage point, JPMorgan Chase & Co. said in a Nov. 28 report. Capistran said the overhaul could bring an additional $20 billion foreign direct investment as soon as 2015 and further strengthen the peso as the market absorbs the news.
The passage comes one year after President Enrique Pena Nieto took office and returned his Institutional Revolutionary Party, or PRI, to power after a 12-year hiatus.
The 47-year-old leader has called the oil overhaul the cornerstone of his administration, following approval of an education bill to make teachers more accountable for performance, a law to spur increased telecommunications competition and a program to jump-start bank lending.
Since joining a free-trade agreement with the U.S. and Canada in 1994, Mexico has become one of the world’s most open trading economies. Even so, many industries are still dominated by single groups, such as billionaire Carlos Slim’s America Movil SAB in mobile-phone service and Comision Federal de Electricidad, or CFE, in electricity.
In October, Congress passed a tax overhaul to reduce the government’s dependence on revenue from Petroleos Mexicanos, the state-owned producer known as Pemex. Proceeds now fund about a third of Mexico’s federal budget.
“It’s an extraordinary moment,” Tony Garza, a former U.S. ambassador to Mexico under President George W. Bush and an adviser at law firm White & Case LLP in Mexico City, said by phone. “There’s potential to attract additional investment into shale and ultra-deep waters so that those resources can be exploited in a way that’s ultimately good for the country.”
The peso slid 0.04 percent to 12.9700 per dollar as of 10:43 a.m. in Mexico City after gaining 0.58 percent yesterday. The nation’s stock market was closed yesterday for a holiday.
The energy overhaul probably will be ratified by a majority of Mexico’s 31 states early next year, with the first contracts based on its model ready by the end of 2014, Alexis Milo, chief economist at Deutsche Bank Securities Inc. in Mexico City, wrote in a research note.
The overhaul “will increase the availability of energy for Mexicans, at more affordable prices, and increase oil and natural gas production,” Eloy Cantu, a PRI lawmaker, said during the bill’s debate. It will “generate greater economic growth that will lead to job creation,” he said.
Before yesterday’s final passage, the bill received approval in general terms in a 354-134 lower-house vote late Dec. 11 and was passed by the Senate three days ago.
The proposal was supported by the PRI, the National Action Party and the Green Party. The Democratic Revolution Party, or PRD, and smaller allied parties say Mexico should hold a voter referendum on whether to allow private investment in the energy industry and that the debate should have first gone through lower house committees.
PRD lawmakers and allies forced the legislative session into a cramped alternate auditorium at the lower house complex in Mexico City after seizing control of the main legislative chamber in a bid to prevent the bill from being debated.
“You’re traitors to your country,” Ricardo Monreal, a Citizens’ Movement lawmaker, shouted after rival legislators assembled at the alternate location. “Indigenous communities and places chosen by foreign companies for extraction won’t allow them on their property,” he said after the vote.
Antonio Garcia, a PRD lawmaker, stripped down to his underwear during a speech before the lower house yesterday to symbolize the bill stripping the nation of its wealth. Manlio Fabio Beltrones, leader of the PRI in the lower house, said the PRD’s seizure of the chamber was undemocratic and that lawmakers had a right to skip the committee stage and proceed to a full house debate.
Mexico is the world’s ninth-largest oil producer, according to the U.S. Energy Information Administration, and possesses the biggest unexplored crude area after the Arctic Circle. Industry analysts and the bill’s authors say the overhaul will reverse eight years of oil output declines for Pemex and increase production to as much as 4 million barrels per day by 2025.
“With reform there will undoubtedly be a spurt of production growth as Mexico is a very rich hydrocarbon area both onshore and offshore,” Ed Morse, the New York-based head of commodities research at Citigroup Inc., said in a phone interview. “Realistically, it could double the amount of oil that Mexico produces.”
Mexico’s oil production has fallen 25 percent to 2.5 million barrels per day from a high of 3.3 million in 2004, according data from Pemex. Should Mexican output reach 4 million barrels daily by 2025, it could surpass Canada to become the world’s fifth-largest producer, given current production levels.
Natural gas production would almost double to as much as 10.4 billion cubic feet by 2025 from current output of 5.7 billion feet, according to the bill. The initiative could push Mexico to become one of the top-five crude exporting countries in the world and a natural gas exporter, Morse said.
Pena Nieto’s government forecasts the initiative will attract investment and spur production that will boost Mexico’s annual gross domestic product growth by 1 percentage point by 2018. The Finance Ministry projects the economy will expand 1.3 percent this year, down from 3.9 percent in each of the past two years and the least since the 2009 recession.
The bill also removes all five representatives of the Pemex workers’ union from the company’s board. Under the new legislation, Pemex’s board will be trimmed to 10 from 15. It will consist of five government members, including the energy minister as board president, and five professional advisers.
Passage of the overhaul will benefit Pemex, Chief Executive Officer Emilio Lozoya said today in an interview with Radio Formula. Pemex will seek to share risks with private producers and expects the government take in some fields to gradually drop to about 70 percent, similar to what is employed in other countries, Lozoya said.
Easing restrictions that have barred the largest international oil explorers from drilling in Mexico for three-quarters of a century will help Pemex revive output and crack vast shale formations, said Brian Youngberg, a St. Louis-based analyst at Edward Jones & Co., who covers oil producers including Chevron and Occidental Petroleum Corp. (OXY:US)
Opening the oil industry to foreign drillers may unleash a wave of exploration equaling Iraq in recent years, Youngberg said. Mexico’s deep-water prospects in the Gulf of Mexico would be attractive to Exxon and Chevron, while shale tracts would probably lure EOG Resources Inc. (EOG:US) and ConocoPhillips, he said in a telephone interview on Dec. 9.
Enticing foreign investment “should jump-start production and get it moving back in the right direction,” he said.
Oil at all stages of production, refining and distribution has been the legal property of the Mexican people since 1938, when then-President Lazaro Cardenas seized fields from U.S. and British companies and changed the nation’s charter. The expropriation is celebrated every March 18 and trumpeted as a point of pride in schoolchildren’s textbooks. Cardenas was from Pena Nieto’s PRI party, which ruled Mexico uninterruptedly for seven decades until 2000.
“The issue of oil is embedded in the Mexican soul, in the Mexican tradition, in Mexican history,” said Jorge Chabat, a political scientist at the Center for Economic Research and Teaching, a Mexico City-based university. Passing the overhaul through Congress “was the mother of all battles for the Mexican government, and the most important success of the Pena Nieto administration so far,” he said in a phone interview.
Oil production has stagnated partly because energy didn’t get the competitive impulse from Nafta that other industries did, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.
“What this reform does is it now exposes the Mexican energy sector to national and international competition,” said Wood. “It marks a fundamental paradigm shift in the mentality of the energy sector. Now we get beyond 1938.”
To contact the reporters on this story: Adam Williams in Mexico City at firstname.lastname@example.org; Eric Martin in Mexico City at email@example.com; Nacha Cattan in Mexico City at firstname.lastname@example.org
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